Families raising a child who plays basketball like the next Lebron James have little to worry about in terms of college financing. The next superstar will most likely receive full scholarships to the college of their choice. However, the rest of us aren’t so lucky; most families are forced to finance college entirely on their own. It is estimated that it will cost a child born this year nearly $225,000 to attend a four-year public college when they turn 18. The cost at a private college will be more than double that: $475,000.

As the cost of post-secondary education continues to rise and state budgets constrict, financing college for students in lower-income families will become an increasing challenge. Investments that parents make when their children are young may be a critical component of the decision to attend college when that child turns 18. And yet the opportunities for lower income families to save and prepare for a child’s education are few and far between.

College savings plans, named 529 plans after the section of the IRS code that created them, are one of the best ways to save money for a child’s education. All the earnings on the investment are free from federal and state tax as long as you use your investment proceeds to pay for a college education. On top of that, many states, including those in the Washington, DC metropolitan area, offer residents generous annual tax deductions on their state income taxes for funds invested in their state’s college savings plan.

529 plans come in two basic flavors: prepaid plans and investment plans. With a prepaid 529, parents are purchasing tuition credits at today’s prices in return for the promise of an equal amount of free credits when the child turns 18 and attends an in-state college (and out-of-state or private colleges for those purchased in the DC metro area). By reimbursing the parents for the value of the current college credits they’ve purchased (or allowing the child to attend a local college using the credits), the prepaid 529 plan maintains the value of the saver’s purchase against the rapidly increasing cost of higher education.

In an investment plan, parents invest in mutual funds or other financial instruments that have been designated by a state as part of the state’s 529 plan. Generally speaking, parents may only invest in their own state prepaid plan but may invest in any state’s investment plan.Yet, despite the increasing need for assistance in college financing, 529 plans may not be the best option for lower-income families. While a college savings plan may provide an important psychological boost and security for the children in low-income families, it has a number of disadvantages for the parents. 529 plans usually cost more than an investment made in the same mutual funds that aren’t a part of a state college savings plan. The tax savings that middle and high-income families experience from tax-free earnings and state tax deductions often handsomely offset this disadvantage. However, families in lower tax brackets will not receive as much tax savings as middle and high-income families simply because they pay at a lower marginal tax rate. A low-income family does not receive the same, or, in the worst case any, subsidy that a middle or high-income family receives for the same size investment.

Imagine two families, the Smiths and the Jones’, each living in the District of Columbia. The Smiths are a low-income family in the 15% federal tax bracket and the 4% D.C. state tax bracket. The Smiths invests $1,000 into a 529 plan when their child is 10 years old, receiving a $1,000 tax deduction on their D.C. income taxes, saving them $40 in taxes. The savings grows to $2,000 by the time the child is ready for college, and when they withdraw the funds, the Smiths save $190 in taxes.

The Jones are a wealthy family in the 28% federal bracket and have a marginal D.C. tax rate of 8.5%. The Jones copy the Smiths investment exactly. Except that same $1,000 tax deduction saves them $85 in taxes. And they save $365 in taxes when they withdraw the funds – their total tax savings were nearly twice that of the Smiths.

If we look at a third family, the Johnsons, who pay no income taxes because of their low income, the situation is even worse. The Johnsons receive absolutely no incentive to invest in the DC College Savings Plan because it is impossible for them to lower their taxes at all. They already pay $0. Because the DC College Savings Plan deduction is non-refundable, the Johnsons have no tax incentive to invest in the Plan.Policy Recommendations

One policy proposal to help families like the Smiths and the Johnsons would be to change the 529 tax deduction into a refundable credit. With a refundable credit, all families that save for their children’s college education would receive the same benefit per dollar saved. In the example above, the District could adjust the credit so that families that invested $1,000 in a single year all received a tax credit of $85, regardless of their income. By offering a tax credit of 8.5% of all money invested in the DC College Savings Plan, up to an annual maximum of $4,000 ($8,000 for married couples), the District could ensure that the wealthy Jones’ still received the same tax reduction they had previously while providing fairer incentives for low income families like the Smiths and Johnsons to invest.

On the federal level, the current Saver’s Credit could be adjusted to include college savings. Currently, low-and-moderate income families who contribute to a retirement plan can get a tax credit of up to $1,000 ($2,000 for married couples) for contributions they make to a retirement account. The credit ranges from 10% to 50% of the contribution the family makes to a retirement account. Including college savings in the credit would be an easy way to give families like the Smiths and Johnsons more incentive to save for their children’s future education.

As a college education becomes increasingly essential for job and income security, creating pathways and reducing barriers for everyone to attend post-secondary education is critical. Systemic changes are key in order to create equal opportunities for financing college; these policy recommendations will allow for lower income families to make investments in their children’s futures.

Monday, June 20, 2011

This week's blog post center's on two recent news pieces that highlight children and youth in DC. First, Friday's edition of Post Local featured the first article of the season on the Summer Youth Employment Program (SYEP). Second, if you've been following the news at all, you have probably heard at least SOMETHING about DC's recent ranking by parenting.com as the #1 "Best City for Families". These two articles don't seem to have a ton in common (and one of them isn't even really an article), but from the vantage point of a youth advocate, there is a decent amount of overlap.

For one, Parenting's explanation of why DC is the best city for families seems to center on the easy access the District provides to cultural landmarks and educational opportunities. The blurb their website uses to defend why DC is #1 says "you don't have to be a child to get an amazing education in this city. Our nation's capital is also known for its plenitude of museums—in fact, there are 44,second only to the Big Apple! If your kid enjoys visiting the National Air and Space Museum, imagine fostering his love of airplanes with trips to nearby Gravelly Point Park for front-seat views of the takeoffs and landings at Reagan National Airport."

Now to be totally honest, this statement is mostly true. DC's museums (well, more so, the choice venues that offer free admission) afford everyone in the District, from young children to the elderly, a fantastic opportunity for learning and enrichment. Now, lets snap back to reality for a moment shall we? Instead of the quote from Parenting let's look at a quote from the DC FiscalPolicy Institute "The District of Columbia’s poverty rate is far above the national average and has remained high even in periods of strong economic growth. Some 133,000 residents — nearly one-quarter of the population — are low income, which in 2006-2007 corresponded to an income at or below $24,475 a year for a family of three.[i] DC’s low-income population is so large that it would overflow RFK Stadium and the Nationals’ Ballpark combined. " The high percentage of low-income residents certainly need not preclude DC from being a fine place for families to live, however the high rates of unemployment, propensity for low educational attainment and a shrinking stock of affordable housing that have recently plagued the District beg the question "What kind of family would rate DC at the top of its list?"

Arnsdorf's Post article, despite being anecdotal, provides some evidence about the types of people who may NOT find the District to be the most appealing of cities. Foremost among those are certainly low and middle income youth. Young people need and want jobs for the same reason adults want and need jobs. Often times for young people, the jobs they hold as youth form the foundation of workforce skills that makes them successful in the workplace. Access to jobs and workforce development opportunities is an absolutely key factor in evaluating livable cities. The lack of jobs offered by SYEP, as well as by private providers this summer does not help young people think DC is a city rife with opportunity and this goes for the bulk of DC's adult workforce as well.

Furthermore, parents of children and youth who may disagree with DC's top ranking probably would not be too hard to find. The Post article talked to both youth and parents who were upset by the lack of summer employment opportunities, but parents concerns often go beyond finding their kids a job. DCAYA has called the public attention time and time again to the OVERALL lack of structured opportunities for children and youth this summer. Summer school enrollments are severely limited compared to what they were last year, the Children and Youth Investment Trust, Corporation only had 1 million dollars to grant out for traditional summer programming and the City’s DPR sites were until fairly recently, woefully understaffed. The summer learning loss that will occur this summer will have negative academic impacts on students for years to come. The graph below from the National Summer Learning Association, illustrates the losses economically disadvantaged students experience during the summer months. Notice that these students already start school a few rungs below their middle-class counterparts. By divesting in meaningful and structured programming for DC's children and youth we are literally undoing the educational gains made during the school year.

Unfortunately the outlook for the same children and youth who will be the most negatively affected by the lack of programming this summer does not become much rosier during the school year. One need only look the FY’12 Budget to see evidence of this. Despite a relatively steady education budget, students and their families are not receiving adequate supports. Without stability in our families,communities and yes even in our labor market, economically disadvantaged students will always start their educational lives well below their peers.

DC has the potential to truly be the #1 place for families in the nation, but we as a city only deserve this distinction if we are a good place for ALL families. Being able to take advantage of amenities like museums and cultural landmarks is part of what makes DC great, however it is unfair to the thousands of individuals and families who call the District home to assert the EVERYONE finds DC a great place to learn and thrive.